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Journal of Economic Geography Advance Access originally published online on November 7, 2005
Journal of Economic Geography 2006 6(2):223-240; doi:10.1093/jeg/lbi019
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© The Author (2005). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Subsidies to poor regions and inequalities: some unpleasant arithmetic

Vincent Dupont* and Philippe Martin**

* MEDEE, University of Lille1, and CADRE, University of Lille2, France. email: <vincent.dupont{at}ed.univ-lille1.fr>
** University of Paris1, Panthéon-Sorbonne, PSE-Jourdan and CEPR. email: <philippe.martin{at}univ-paris1.fr>

This paper analyzes the effect of different regional subsidies to poor regions on industrial location, employment, income inequality and welfare in the presence of agglomeration forces when firms are mobile. The impact on location of such subsidies is stronger when trade costs are low. With mobile capital, regional subsidies such as tax breaks in the poor region lead to higher profits for firms in both regions. If financed at the national level, such subsidies given to firms in the poor region increase inequality between and within regions. Finally, with relocation costs, such regional subsidies may hurt the poor region.

Keywords: Regional subsidies, regional inequalities, economic geography,
JEL classifications: R0, H2, H7
Date submitted: 24 March 2004     Date accepted: 13 September 2005


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